Do Geopolitical Risks Impact Trade Patterns in Latin America?

ABSTRACT

The rapid rise of China as a major economic power, characterized by its expanding global trade and financial connections, has significantly heightened geopolitical tensions, particularly with the US. The primary objective of this study is to examine the ramifications of such geopolitical risks (GPR) on trading patterns within Latin America, employing a gravity model. The selection of Latin America stems from its ongoing transformation in power dynamics, with China emerging as the second largest partner, posing substantial competition to the US, which has historically been the region’s primary trading partner. This region has also emerged as an attractive investment and trade destination with abundant natural resources and a growing middle class. By focusing on seven of the largest economies in Latin America – Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela – from 2000 to 2020, our study yields valuable insights into the influence of GPR on trade dynamics. The findings underscore the overall detrimental impact of GPR on trade, with a disproportionately adverse effect on imports. This study represents a significant contribution by bridging existing gaps in the literature, particularly within the underexplored context of Latin America, while providing crucial guidance for policy formulation and informing future research endeavours.

KEYWORDS:

• Geopolitical risk
• trade flows
• international trade
• emerging economies
• Latin America

JEL CLASSIFICATION:

• F14
• F36
• F62
• F23

Acknowledgments

The authors are grateful for helpful comments from the participants at the 2022 Canadian Economics Association Conference and the 2023 Association of International Business Conference.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Caldara and Iacoviello (2022) defines GPR as ‘the risk associated with wars, terrorist acts, and tensions between states that affect the normal and peaceful course of international relations.’

2. For detailed description of the methodology and data, see https://www.matteoiacoviello.com/gpr.htm and Caldara and Iacoviello (2022).

3. These newspapers include: The Boston Globe, the Chicago Tribune, The Daily Telegraph, the Financial Times, The Globe and Mail, The Guardian, the Los Angeles Times, The New York Times, The Times, The Wall Street Journal, and the Washington Post.

4. Source: https://www.whitehouse.gov/briefing-room/statements-releases/2021/06/12/fact-sheet-president-biden-and-g7-leaders-launch-build-back-better-world-b3w-partnership/

5. Please note the choice of the selected countries is due to the availability of the GPR country index for these countries. Also, Table A1 in the Appendix provides a summary of the trade between them and China/US. Please note log GPR estimates are used in the model.

6. The capital cities are as follows: US (Washington), China (Beijing), Argentina (Buenos Aires), Brazil (Brasilia), Colombia (Bogota), Peru (Lima), Chile (Santiago) and Venezuela (Caracas).